Equities - the path of least resistance appears to be up.

For now at least the path of least resistance for equities appears to be up. Whatever the reason or rationale, buyers are currently in control, and until this changes, it would be safest to assume there are further highs ahead. The consolidation of recent weeks appears to have finally ended,and it would appear we are now making a thrust away from this, indeed this move appears to be occurring across a number of markets, which adds credence to the idea of further gains ahead. The charts below echo this point, the first set of charts show a selection of US equity indices, the second set of charts show the DAX index and Eurostoxx Index futures this morning.

The next chart shows the VIX index, this appears to have made a break below a large Descending Triangle over the past few months, this drop in volatility below support should be a favourable development for equities.

 

The last chart is the old laggard, the KBW Bank Index, this still lags the rest of the market, however interestingly it is very close to completing an inverse Head + Shoulders continuation pattern, a clear break up through 48.00 (it closed marginally through here last night) would suggest this may finally start to join the Bullish party. 

 

Stock Markets Churning, Euro area weakness probably currency related.

Markets continue to churn, in a rather ugly fashion. The SP500 briefly broke below 1130 yesterday on poor volume and follow through was lacking. Elsewhere shares in EURO area countries have been moving lower over the past few days, however I stress EURO area as opposed to Europe, the UK index has not drifted off with European shares. This suggests that we may be seeing a reaction to the stronger EURO rather than anything more concrete.  The charts below emphasise this point. The top chart shows the German DAX future relative to the SP500 since the beginning of April, with the EURUSD FX chart directly below. Note how both indices dropped more or less in tandem through May, however towards the end of May, the DAX started to outperform the SP500, probably helped by the EURUSD weakness. This out-performance on the DAX has been maintained since then, however the recent EURO strength maybe the reason that over the past few days the out-performance of the DAX may be starting to lessen.

The next 2 charts show the EUROSTOXX 50 index and the UK FTSE index, note how the EUROSTOXX has been moving lower in recent days, whilst the FTSE has maintained recent levels. The third chart below shows the EURO FX rate versus the UK pound (GBP), the Euro has seen good recent strength here too. This backs up my view that the recent under-performance in EURO area stocks is probably more closely linked to Euro strength than anything else.

 

EURUSD may be topping + DAX Index

My first stab at suggesting  EURUSD topping occurred just ahead of the NFPs on Friday. Unfortunately the weak payroll number saw the USD get hit and the EUR rallied from sub 1.3200 to 1.3334. In the 24 hours of trading since post-payroll time, the USD has recovered all its lost ground, and despite the resistance being taken out on Friday, the failure to hold over that resistance has to be seen in a poor light. This may of course just be pre-positioning for the FOMC, or it could be a real sign of impending weakness.  - I have reproduced the original chart of the daily EURUSD updated but with the same levels highlighted. A couple of significant developments since Friday's original chart. Firstly, the EURUSD has breached the rising support line, Secondly, the move higher in Friday and subsequent failure, has created further bearish momentum divergence on the Daily and 4 hourly chart. I am now in the camp that a topping process is occurring, which could see a return broadly to the 1.2720-1.2780 area.  - It would take a sustained move back over 1.3300 to lessen the chance of this occurring, though a re-rest of the support line in the low 1.3200s is quite possible.- Ideally a clear break and hold below Thursday's low at 1.3119 would add weight to this EURUSD topping view.   - The top chart below is the daily EURUSD. The lower chart is the 4 Hourly EURUSD.

(Click on charts to enlarge).

Many Stock markets appear to be at interesting junctures, the SP500 is a whisker away but still below Junes 1132 interim high, Eurostoxx 50 has broken the key 2800 level though is struggling to push higher, whilst the FTSE is consolidating just below an interim high made mid-May post-Flash Crash. However the DAX index last week made a post-financial crisis high, and appears to be trying to break out of an 'Ascending Triangle' pattern, which has been created over the past four months. A successful break out of this triangle could see the DAX make strong gains over the next few months. I would however like to add a note of caution. The DAX is running into strong resistance from two key Fibo levels, these levels are 6409 which is 61.8% correction of the entire drop  from the 2007 high, and 6372 which is 76.4% correction from the 2008 high and bear market correction level. Last week's high was 6387 which took the DAX into this Fibo resistance zone, currently as I write it sits just below 6300. - This 6372/6409 area is thus likely to be the key battleground for the DAX in the next few weeks: How well it breaks above, or how decisively it fails to break this level is likely to determine near-term direction.  -The 2 charts below show the DAX weekly charts. the top chart is 2006-2010, the lower chart is a zoom in of this chart for 2010.

(Click on charts to enlarge).

 

Equities Topping Patterns - Everywhere

My post yesterday highlighted the risk of a short-term bounce, everything was setting up for a 'key-day reversal'. Well the bounce as it happened was very very short-term, the indices made it to the neckline of the Head & Shoulders pattern which broke last week before falling away. Though the S+P futures, did manage to complete a weak 'key-day reversal', this was not confirmed on the S+P500 index itself. Looking ahead some of the conditions still exist for this bounce to re-occur, however I think the odds have become remote for now. Looking at the bigger picture, though recent days' price action has show indecision, refering back to some of my earlier posts, I feel we may head lower soon, and possibly much lower.

Beyond that, I have decided to see how the bigger picture looks across a wide variety of markets. One of the maim tenet's of Charles Dow's original 'Dow Theory' was that of confirmation. Dow believed that a directional move or trend in the Dow Industrials Index could not occur unless the Railway's average (The Dow Transports Index) was moving in the same direction. If they diverged, then this called in to question the sustainability of the trending move. - The world has moved on since then, there are far more markets, covering specific sectors, or different size of market capitalisation. To that end I have looked as charts across a broad spectrum of indices, these can be seen below. All charts have a similar topping formation and each one has recently broken to the downside. To me this is strong confirming evidence, which adds weight to the major topping pattern, the Head & Shoulders, which should portend significant lower levels in the weeks and months ahead.
Beyond the US markets, it is also worth looking at global markets. The following charts show a selection of major G7 markets. What is clear here is once again we have similar topping patterns, though the German DAX offered a variant of the Head & Shoulders and has not yet made a new low for the recent phase (nor have a number of other markets within the EURO bloc).

The next set of charts move beyond the US and G7 countries and look at a variety of markets symbolic of Asia, South America and Commodity countries. Once again the major topping pattern is evident in all three charts. The Hong Kong markets has produced another variant of the Head & Shoulders pattern, this is probably because of the strong Chinese influence, - Chinese stocks indices seem to march to a very different beat. - As was the case with the German market, these have yet to make new lows for the recent move, however they all appear to have a strong downward bias.

TIPPING POINTS ???????!

Overnight markets across the board saw significant moves. Chinese equities dropped sharply, the various indices posted declines of around 4-5%, this has seen follow through in other Asian indices, though not as steep as the Chinese decline. In Europe the move has seen declines of around 2 - 3% thus far, and S&P futures are currently down around 1.3%. Elsewhere global bond markets rallied, leading to a further declines in yields, with the US 10 year yield breaking below 3%. It now appears that Japan, Europe and the US 10 year government yields have all broken key levels... Meanwhile the USD has posted gains versus the Euro and the USDJPY has dropped and is moving close to the spike low posted on the night of the Flash Crash. -- Also worth noting that European spreads PIIGS v Germany have continued to back up following recent declines......
I have posted a selection of charts showing significant markets and the current move in a wider context... FWIW, I believe we are possibly approaching the end of this corrective phase on equity indices, though until the lows of late-May/Early June are clearly broken, this still has the ability to confound me and prove me completely wrong.